The proposal the board approved was submitted by Pontiac Emergency Manager Lou Schimmel, who also plans to provide a $400 monthly pension benefit increase for retirees to help offset the cost of health insurance.

The benefits are being cut for two years, until an alternative is found or the city's finances rebound.

"Without this approval, the city is not financially fixed," Schimmel said of the vote in Lansing, which he joined by phone. Retiree health care benefits cost the city about $6 million annually, roughly equal to Pontiac's remaining structural deficit.

Advertisement

At an Emergency Loan Board meeting last week, Schimmel was asked what would happen if his plan weren't approved.

"I'm going to be talking to you about bankruptcy," he replied.

The Pontiac City Council's counterproposal pitched a complex transfer from an overfunded city pension plan.

Council President Pro Tem Patrice Waterman, a city retiree, was one of four council members present at the Emergency Loan Board meeting. Waterman said she's pleased the board left the door open to alternative proposals.

"In one way, it was a little disheartening in that we couldn't get more time in order to do what we needed to do," she said, "but it won't be a burden on our taxpayers. That right there is a win, that this will not fall on the taxpayers."

Schimmel floated a millage proposal to pay for retiree health care, but voters rejected it in November. Unpaid city obligations have the potential to become judgment levies on the tax roll when the city is sued for a debt.

"All of us have to come to the table and try to work this out. I really do not want another lawsuit going out there," Waterman said. "I'm going to hope for the best."

The councilwoman said she hopes the details of the health care set-aside are released quickly so retirees can research their options.

The city's new budget, which began July 1, pays for retiree health care through Sept. 1 using proceeds from the sale of Lot 9, a downtown parking lot, and the anticipated sale of the Pontiac Municipal Golf Course.

With the last major piece of his budget now in place, Schimmel said he plans to leave City Hall on or around Aug. 1. The city's finances have been under state control since March 2009, and Schimmel is the city's third state-appointed manager.

The elimination of health insurance for retirees is likely to face a legal challenge from the City of Pontiac Retired Employees Association, an organization that already has several pending lawsuits against the city related to benefit cutbacks.

"Of course, we're more than disappointed that they're going to cut health care. It was a promised benefit," said Claudia Filler, the association's president. She said the pension benefit increase won't cover the cost of health care for retirees, "especially for people who are not on Medicare."

House Minority Leader Tim Greimel, a Democrat from Auburn Hills who represents Pontiac, said: "Under the circumstances, it was the best outcome we could have hoped for."

The good news, Greimel said, "is that the board has left the door open to alternative proposals that would allow the full reinstatement of retiree health care benefits."

The officials at Monday's meeting "should be commended on their constructive approach," Greimel said.

The counterproposal made by the Pontiac City Council was for what's known as a "420 transfer," named for a section of the Internal Revenue Service code, from a 150 percent-funded city pension plan with about $450 million in assets.

A 420 transfer allows the use of 50 percent of a pension fund's earnings each year over and above projected returns to pay for retiree health care, per state law. Federal law dictates that the transfer can't bring the pension plan beneath a 125 percent funding level.

Schimmel has said that in three of the last six years, the pension fund didn't earn enough to allow a transfer for retiree health care under the formula, making a 420 transfer an uncertain funding source.

The transfer requires IRS approval, which likely couldn't be completed by Sept. 1.

Michigan Department of Treasury Spokesman Terry Stanton said the Emergency Loan Board gave both proposals thoughtful consideration before agreeing that Schimmel's proposal "serves the best interest of the public and the City of Pontiac."

Michigan's emergency manager law, Public Act 436, outlines a process to counter actions by an emergency manager that involve more than $50,000 by submitting a proposal that realizes equal savings.

The law states that the Emergency Loan Board must then select "the proposal that best serves the interest of the public in that local government."

Schimmel and the Pontiac City Council's proposals for dealing with the city's retiree health care obligation represented the first time that the Emergency Loan Board decided such an issue under the emergency manager law, which took effect March 28.

Stanton said the plan that was chosen "not only addresses an expected $6 million budget shortfall, but ensures retirees will have the ability to purchase health care through the increased pension payment they will receive."

The set-aside of retiree health care was a Plan B for Schimmel, who had urged the Pontiac General Employees Retirement System board to vote to dissolve and join the state Municipal Employees' Retirement System, buying in at a 120 percent funding level and using the remainder of its surplus to fund retiree health care.